Castings swings to a loss as output collapses

Iron casting and machining specialist Castings (CGS) has been squeezed by the Covid-19 disruption to industrial activity. Commercial vehicle makers account for around 70 per cent of its total sales and the closure of their production facilities translated to an 80 per cent drop in output for the group in April and May. While there has been a recovery in demand from heavy truck manufacturers, monthly demand levels had only returned to 85 per cent of pre-pandemic levels at the end of September.

The majority of revenue comes from foundry activities, but the steep decline in output saw the segment’s sales plunge by more than two-fifths to £41m. Lower volumes and production inefficiencies eroded margins and the foundry adjusted operating profit collapsed by close to 90 per cent to just £0.8m. 

Despite the turmoil, Castings has been investing in its facilities, deploying £1.6m to upgrade its foundry production line and install a new heat treatment plant. It also spent £0.8m on its machining operations, most of which went towards improving automation and productivity. Yet the potential benefit of these investments will only become evident once production volumes increase.

It was not all bad news. The group is hopeful that heavy truck demand will continue to bounce back and it has won new projects from European truck customers that will commence from next year. It also has no long or short-term borrowings and has increased its net cash position by 5 per cent from the March year-end to £35m. Yet it is still a highly cyclical business and auto-manufacturers will likely curb production during a recession. Sell.

Last IC View: Sell, 376p, 11 Jun 2020